by Henry Soediarko and Alexander Kalis
In December 2023, the majority of Asian equity indices experienced positive growth. Specifically, Kospi gained 5.1% in USD terms, Topix increased by 4.7%, while Hong Kong and China exhibited underperformance with Hang Seng remaining flat and HSCEI declining by 1.5%. Additionally, MSCI APAC showed a 4.4% increase during the same period.
The Dollar Index declined by another 2.3% in December, following a 3% drop in November, resulting in a 2.3% decrease YTD. This decline stems from the Federal Reserve’s announcement that a rate cut is expected three times in the next year, 2024. This is a stark contrast to the ‘higher for longer’ narrative that had paralyzed global equity markets around four months earlier. The Yen bottomed at 151 around mid-November and has since gained 6.3%. Investors were concerned that the BOJ might tighten monetary policy and start hiking rates, which would strengthen the Yen. However, this did not occur, leading to a rally in the Topix from December lows of 2320 to 2366 in two weeks.
We increased our exposure in a Korean renewable energy play, slightly after building most of the exposure last month. We initiated a position in a Japanese paper manufacturing company that stands to benefit from a stronger Yen, a factor not yet reflected in its share price. We exited a low-carbon transport name in Hong Kong/China, as our on-the-ground research indicated it was unlikely to bounce back soon due to the difficult market environment in China. We reduced our exposure in a Singapore-based renewable energy name after its share price rallied almost 12% in November and added more in a Singapore low-carbon transportation name, benefiting from higher ridership potential in the holiday season and the extension of the visa-free arrangements for Chinese tourists in Singapore as well as the increase of the commission from platform booking fees from 5 to 7% in January 2024. We further reduced our exposure in Hong Kong/China while increasing it in Japan and Korea. This strategy paid off in December, as the latter two markets rose by mid-single digits, while Hong Kong/China was flat. We completely exited a green consumer staple position in Hong Kong/China this month, avoiding an additional 8% decline in the share price, as soybean prices held steady.
Following two strong months in November and December, we anticipate short-term profit-taking, but the outlook remains positive, expecting rate cuts in the coming year. China, after four consecutive down years, appears very cheap, although this has been a recurring investor narrative for the past two years. We remain selectively constructive with our Chinese exposures. In Japan, corporate restructuring and a weak Yen are expected to drive an economic rebound, boosting investor confidence. In South Korea, the continuation of the short-selling ban until mid-2024 and the US IRA expansion remain key drivers.
As we enter the new year, the escalating issue of climate-induced displacement, as highlighted in a recent CNBC article, presents a stark reminder of the intertwined nature of environmental, economic, and social challenges. This reality amplifies the importance of integrating climate resilience and adaptation strategies into our investment decisions and broader economic policies. As we navigate the shifting landscapes of global markets, the plight of climate migrants — often overlooked and voiceless — serves as a powerful testament to the profound impact of our actions and inactions on the most vulnerable. Our approach to investments and economic development must, therefore, be recalibrated to account for these emerging challenges, ensuring that we contribute positively to a future that is sustainable, inclusive, and resilient in the face of a rapidly changing climate. With optimism that we can achieve these goals together, Milltrust wishes you all a ‘Sustainably Prosperous’ 2024!